Germany's Federal Constitutional Court has passed the buck on a case that will decide whether the European Central Bank can do its job. That's good. The decision is now where it belongs, with the European Court of Justice.
The matter should have gone to the ECJ, the body responsible for interpreting the European Union's treaties, in the first place, as two dissenting judges said. Without delay, the court should take a wide, pragmatic view of the ECB's powers.
At issue is the ECB's ability to buy government debt in support of financial stability and economic activity. With Europe's short-term interest rates close to zero and deflation threatening, asset-purchase programs are a tool the ECB needs. The problem is, the treaty that created the euro casts doubt on whether and exactly how the ECB can use them. One such program, called Outright Monetary Transactions, is the subject of the case.
The treaty was framed when governments saw inflationary financing of budget deficits as the biggest danger. Today, there are greater risks -- that defaults might cascade through Europe's financial system, and that monetary policy is helpless once interest rates have fallen to zero. The ECB is prohibited from lending directly to governments, but buying government debt in secondary markets, as under OMT, may pass muster. The court should say it does, and it should reject the advice of Germany's Constitutional Court to say otherwise or impose stringent restrictions.
Remember why the OMT program was created: In the summer of 2012, investors believed that Greece might default, causing the euro system to disintegrate, in turn causing other defaults. With governments unwilling or unable to act, ECB President Mario Draghi announced the OMT program -- essentially, a pledge to intervene if necessary. The promise worked without the ECB ever having to buy assets: Knowing that it stood ready was enough. If Germany's Bundesbank and other opponents of OMT had won the day, Europe's economic crisis would have been enormously worse -- and that's saying something.
The same problem could arise again if investors believe the ECB will no longer do "whatever it takes," as Draghi put it, to support the euro system. That's why the central bank was right to affirm that its earlier pledge remains in force while the ECJ weighs the arguments about OMT. Beyond that, the central bank and Europe's governments should examine how far the legal envelope can be pushed to allow programs that go further. OMT focuses on financial stability; avoiding deflation is no less important. Bigger, bolder forms of quantitative easing may soon be necessary to ward off this danger. One way or another, this tool must be made available.
It certainly raised an eyebrow when I read about this move by Germany’s Federal Constitutional Court over the weekend. Not least because there would have been a very big bust-up within the European Union and the Euro if the ECB, led by the very competent Mario Draghi, had not followed his policy.
Some people favour dissolution of the EU and the Euro. I disagree, unless that is what the EU’s member states decide. However, a disorderly collapse in 2011 would have been a catastrophe, and not just within the EU. Every country which has investments and trade relationships with the EU would have been badly affected.Back to top